Task force pitches for rupee trade with neighbours

Amiti Sen Richa Mishra New Delhi | Updated on May 07, 2014 Published on May 07, 2014

This will help minimise currency risks faced by India’s exporters

India could consider rupee trade with Pakistan, Myanmar, Sri Lanka and some other South Asian countries to minimise currency risks faced by exporters.

According to the report of the task force on trading in local currencies, which focuses on ways to reduce India’s dependence on hard currencies, especially the US dollar, has zeroed in on the easier option of rupee trade for the South Asian countries as India is the larger trading partner in the region and is in a position to manage such an arrangement.

This is also expected to rein in the current account deficit, which has been the primary focus of the UPA Government.

A task force with representatives from various Ministries was formed in 2013 to draw a list of countries with which India could trade in local currencies. Its report is now with the Finance Ministry which would prepare a short-list based on the feasibility following which bilateral negotiations would begin. “Through this model (rupee trade), institutional credit could be offered to foreign importers thereby enhancing trade financing options. Permitting hedging of rupee by importers would make them accept the rupee invoicing mechanism,” the report, a copy of which is available with Business Line, said.

For other trading partners such as Australia, Japan, Korea, Canada and China, the report has proposed bilateral trade settlement with invoicing in exporters’ currency which may need to be backed by swap arrangements in some cases. These are more elaborate arrangements which involve the central bank and require pre-fixing of exchange rates.

Trade settlements

Although South Asia accounts for about 5.5 per cent of India’s total exports and less than 0.55 per cent of its imports, the region is strategically important for the country and attempts are on to boost trade through various bilateral and regional trade agreements, including the South Asia Free Trade Agreement.

Adverse balance

Under the rupee payment model, all trade settlements could be done in Indian rupee. Banks in the two countries would accumulate their claims against each other under a centrally organised arrangement and settle the same at pre-determined periodicity, preferably daily, in Indian rupees.

In case there is an adverse trade balance of India vis-à-vis the partner country, exporters/importers or banks from the participating country may be allowed to open and maintain non-interest bearing rupee accounts with banks in India.

The balances would be used only in trade settlements between India and the partner country.

In case, trade balance is in favour of the partner country, India could offer rupee line of credit, as is presently done in the case of Bhutan.

“This would also help the partner countries that are facing foreign currency crisis,” the report said.

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Published on May 07, 2014
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